Wednesday, 14 August 2013

"Inventory Management in Logistics" by Ajit Mishra's Online Classroom

High-level Inventory Management:------
It seems that around 1880
there was a change in manufacturing practice from companies with
relatively homogeneous lines of products to horizontally integrated
companies with unprecedented diversity in processes and products. Those
companies (especially in metalworking) attempted to achieve success
through economies of scope - the gains of jointly producing two or more
products in one facility. The managers now needed information on the
effect of product-mix decisions on overall profits and therefore needed
accurate product-cost information. A variety of attempts to achieve this
were unsuccessful due to the huge overhead of the information
processing of the time. However, the burgeoning need for financial
reporting after 1900 created unavoidable pressure for financial accounting
of stock and the management need to cost manage products became
overshadowed. In particular, it was the need for audited accounts that
sealed the fate of managerial cost accounting. The dominance of
financial reporting accounting over management accounting
remains to this day with few exceptions, and the financial reporting
definitions of 'cost' have distorted effective management 'cost'
accounting since that time. This is particularly true of inventory.
Hence, high-level financial inventory has these two basic formulas, which relate to the accounting period:

Cost of Beginning Inventory at the start of the period + inventory purchases within the period + cost of production within the period = cost of goods available

Cost of goods available − cost of ending inventory at the end of the period = cost of goods sold

The benefit of these formulas is that the first absorbs all overheads
of production and raw material costs into a value of inventory for
reporting. The second formula then creates the new start point for the
next period and gives a figure to be subtracted from the sales price to
determine some form of sales-margin figure.
Manufacturing management is more interested in inventory turnover ratio or average days to sell inventory since it tells them something about relative inventory levels.

Average Days to Sell Inventory = Number of Days a Year / Inventory Turnover Ratio = 365 days a year / Inventory Turnover Ratio

This ratio estimates how many times the inventory turns over a year.
This number tells how much cash/goods are tied up waiting for the
process and is a critical measure of process reliability and
effectiveness. So a factory with two inventory turns has six months
stock on hand, which is generally not a good figure (depending upon the
industry), whereas a factory that moves from six turns to twelve turns
has probably improved effectiveness by 100%. This improvement will have
some negative results in the financial reporting, since the 'value' now
stored in the factory as inventory is reduced.
While these accounting measures of inventory are very useful because
of their simplicity, they are also fraught with the danger of their own
assumptions. There are, in fact, so many things that can vary hidden
under this appearance of simplicity that a variety of 'adjusting'
assumptions may be used. These include:

Inventory Turn is a financial accounting tool for evaluating
inventory and it is not necessarily a management tool. Inventory
management should be forward looking. The methodology applied is based
on historical cost of goods sold. The ratio may not be able to reflect
the usability of future production demand, as well as customer demand.
Business models, including Just in Time (JIT) Inventory, Vendor
Managed Inventory (VMI) and Customer Managed Inventory (CMI), attempt to
minimize on-hand inventory and increase inventory turns. VMI and CMI
have gained considerable attention due to the success of third-party
vendors who offer added expertise and knowledge that organizations may
not possess.

1 comment:

Respected Sir Ajit Mishra ,Thanks for providing this blog of your Ajit Mishra's Online Classroom to your students and followers . This is really great blog for teaching and education . I think one day this blog become a milestone in the world of Education .

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About Me

Lifetime Chartered Member" of "The Chartered Institute of Logistics & Transport - India", New Delhi . I am working a Trainer, Tutor and Course Provider for Logistics and Supply Chain Management . Also provide counseling service to students and professionals regarding education, training and job in the field of Logistics and Supply Chain Management .